nep-int New Economics Papers
on International Trade
Issue of 2010‒11‒20
fourteen papers chosen by
Alessia A. Amighini
University Amedeo Avogadro

  1. Modes of foreign direct investment and patterns of trade: Why do multinational enterprises come To China? By Park, Innwon; Park, Soonchan
  2. Intermediaries in International Trade: direct versus indirect modes of export By Andrew B. Bernard; Marco Grazzi; Chiara Tomasi
  3. Foreign Aid and Recipient Countries` Exports: Does Aid Promote Bilateral Trade? By Felicitas Nowak-Lehmann D.; Inmaculada Martinez-Zarzoso; Adriana Cardozo; Dierk Herzer; Stephan Klasen
  4. Why are Trade Agreements Regional? By Ben Zissimos
  5. The Trade Effects of Endogenous Preferential Trade Agreements By Peter Egger; Mario Larch; Kevin E. Staub; Rainer Winkelmann
  6. Tariff Pass-Through, Firm Heterogeneity and Product Quality By Zhi George Yu
  7. Exports Versus FDI Revisited: Does Finance Matter? By Claudia M. Buch; Iris Kesternich; Alexander Lipponer; Monika Schnitzer
  8. Exporters and the Rise in Wage Inequality – Evidence from German Linked Employer-Employee Data By Daniel Baumgarten
  9. Trade, Wages and Productivity By Kristian Behrens; Giordano Mion; Yasusada Murata; Jens Südekum
  10. Within and Between Panel Cointegration in the German Regional Output-Trade-FDI Nexus By Timo Mitze
  11. Credit Market Quality, Innovation and Trade By Terra Cristina; Vasconcelos Enrico
  12. Measuring the price elasticity of import demand in the destination markets of Italian export By Alberto Felettigh; Stefano Federico
  13. A Free Trade Area of the Asia Pacific (FTAAP): Is It Desirable? By Park, Innwon; Park, Soonchan; Kim, Sangkyom
  14. A causal interpretation of extensive and intensive margin effects in generalized Tobit models By Kevin E. Staub

  1. By: Park, Innwon; Park, Soonchan
    Abstract: This paper investigates the link between patterns of trade and modes of foreign direct investment (FDI) by utilizing exports, imports, and inward FDI data for China over the period 1998 to 2007. We construct a modified gravity equation to find the main modes of inward FDI into China with considering spatially interdependent third country effect. The problem of endogeneity is controlled by applying the system generalized method of moments (GMM) estimation technique. We find that there is no evidence of statistically significant substitutability and complementarity between bilateral trade and FDI in the aggregate data. On the contrary, the trade-diverting third country effect of inward FDI is proven to be strong. As we decompose the aggregate trade goods into final and intermediate goods, we find that there is strong evidence of vertical FDI for importing intermediate goods from the home country and exporting final goods back to the home country. However, the motivation of vertical FDI has been diminishing and the modes of export-platform and complex vertical FDI have begun to emerge. This implies that China has imported intermediate inputs from the home country of FDI, produced final goods or parts and components, and exported them back to the home country. Recently, however, we have noticed that there has been a diversion trend of the vertical linkage from home country to third countries. This indicates that the main mode of inward FDI into China has been shifting from “home export base” to “third country export base”.
    Keywords: patterns of trade; foreign direct investment; multinational enterprises; China
    JEL: F23 F21
    Date: 2010–11–08
  2. By: Andrew B. Bernard; Marco Grazzi; Chiara Tomasi
    Abstract: This paper contributes to the relatively new literature on the role of intermediaries in international trade. Using Italian firm-level data, we document significant differences between exporters of different types and highlight the role of country-specific fixed cost in the choice of direct versus indirect modes of export. Recent theoretical work suggests that intermediaries are typically providing solutions to country-specific fixed costs. Our empirical results largely confirm this relationship. Measures of country fixed costs are positively associated with intermediary exports both in the aggregate and within firms. In contrast, proxies for variable trade costs are largely not correlated with differences between direct and indirect exports.
    Keywords: heterogeneous firms, international trade, intermediation, wholesalers
    JEL: F14 L22 L23
    Date: 2010–11–10
  3. By: Felicitas Nowak-Lehmann D. (Georg-August-Universität Göttingen, Germany); Inmaculada Martinez-Zarzoso (Georg-August-Universität Göttingen, Germany); Adriana Cardozo; Dierk Herzer (Schumpeter School of Business and Economis, Wuppertal / Germany); Stephan Klasen (Georg-August-Universität Göttingen / Germany)
    Abstract: This paper uses the gravity model of trade to investigate the link between foreign aid and exports in recipient countries. Most of the theoretical work emphasizes the negative impact of aid on recipient countries’ exports primarily due to exchange rate appreciation, disregarding possible positive effects of aid in promoting bilateral trade relations. The empirical findings, in contrast, indicate that the net impact of aid on recipient countries’ exports is positive -even though the macroeconomic impact of aid is rather small- and that the average return for recipients’ exports is about 1.50 US$ for every aid dollar spent. We argue that “bilateral aid” seems to promote good bilateral trade relations, mutual trust and familiarity and that those factors reinforce bilateral trade, including recipient country exports. The paper also estimates the effect of different types of aid (bilateral aid versus multilateral aid flowing to a specific recipient) and studies aid’s contribution to an expansion of exports in different regions of the world. It is found that aid is strongly export-enhancing in Asia and Latin America, but not in Africa.
    Keywords: International trade; foreign aid; recipient exports; bilateral trade relations
    JEL: F10 F35
    Date: 2010–11–10
  4. By: Ben Zissimos (Department of Economics, Vanderbilt University)
    Abstract: This paper shows how distance may be used to coordinate on a unique equilibrium in which trade agreements are regional. Trade agreement formation is modeled as coalition formation. In a standard trade model with no distance between countries a familiar problem of coordination failure occurs, giving rise to multiple equilibria; any one of many possible trade agreements can form. With distance between countries, regional trade agreements generate larger rent-shifting effects than non-regional agreements. Countries use these effects to coordinate on a unique equilibrium.
    Keywords: Coalition, coordination, regionalism, preferential trade agreement, trade liberalization
    JEL: F02 F13 F15 C72
    Date: 2010–03
  5. By: Peter Egger (KOF Konjunkturforschungsstelle, Swiss Federal Institute of Technology, Zurich); Mario Larch (University of Bayreuth); Kevin E. Staub (Socioeconomic Institute, University of Zurich); Rainer Winkelmann (Socioeconomic Institute, University of Zurich)
    Abstract: Recent work by Anderson and van Wincoop (2003) establishes an empirical modeling strategy which takes full account of the structural, non-(log-)linear impact of trade barriers on trade in new trade theory models. Structural new trade theory models have never been used to evaluate and quantify the role of endogenous preferential trade agreement (PTA) membership for trade in a way which is consistent with general equilibrium. Apart from this gap, the present paper aims at delivering an empirical model which takes into account both that preferential trade agreement membership is endogenous and that the world matrix of bilateral trade flows contains numerous zero entries. These features are treated in an encompassing way by means of (possibly two-part) Poisson pseudo-maximum likelihood estimation with endogenous binary indicator variables in the empirical model.
    Keywords: Gravity model, Endogenous preferential trade agreement membership, Poisson pseudo-maximum likelihood estimation with endogenous binary indicator variables
    JEL: F14 F15
    Date: 2010–11
  6. By: Zhi George Yu
    Abstract: Previous studies on tariff pass-through were constrained at the industry level. This paper is the first attempt to explore tariff pass-through at the firm level, and to investigate how it depends on firm heterogeneity in productivity and product differentiation in quality. Using an extended version of the Melitz and Ottaviano (2008) model, I show that exporting firms absorb tariff changes by adjusting both their markups and product quality, which leads to an incomplete tariff pass-through. Moreover, tariff absorption elasticity negatively depends on firm productivity for quality differentiated goods, but positively depends on firm productivity for quality homogeneous goods. Using the U.S. transaction level export data and plant-level manufacturing data, I find evidence for these predictions. The firm-level tariff absorption elasticity is 0.87 on average. All products in the sample on average fit the definition of quality differentiated goods, and the tariff absorption elasticity is indeed higher for low productivity firms (1.27) and lower for high productivity firms (0.44). Dividing all products into quality homogeneous goods and quality differentiated goods in terms of various criteria also results in estimates consistent with model predictions for quality differentiated goods.
    Date: 2010–10
  7. By: Claudia M. Buch (University of Tübingen); Iris Kesternich (University of Munich); Alexander Lipponer (Deutsche Bundesbank); Monika Schnitzer (University of Munich and CEPR)
    Abstract: This paper explores the impact of financial constraints on the internationalization strategies of firms. It contributes to the literature by focusing on three aspects: First, the paper studies the impact of financial constraints on exporting relative to FDI. Consistent with theory, the empirical results confirm that the impact of financial constraints is stronger for FDI than for exporting. Second, the paper analyzes the extensive and the intensive margins and finds that financial frictions matter for both. Third, the paper explores the impact on manufacturing as compared to service industries and shows that firms in service industries are affected more than firms in manufacturing. The paper also identifies a threshold effect: Financial constraints do not matter for small firms whose productivity seems to be too low to consider international expansions.
    Keywords: Multinational firms, exports versus FDI, financial constraints, heterogeneity, productivity
    JEL: F2 G2
    Date: 2010–11
  8. By: Daniel Baumgarten
    Abstract: Using a linked employer-employee data set of the German manufacturing sector, this paper analyses the role of exporting establishments in explaining rising wage dispersion. Over the period of analysis (1996–2007), the raw wage differential between exporters and domestic establishments increased substantially, which can only partly be attributed to corresponding changes in human capital endowments and the returns to them. These findings are consistent with recent heterogeneous-fi rm trade models that feature an exporter wage premium as well as variability of the premium with respect to increasing trade liberalization. A decomposition analysis shows that the increase in the conditional wage gap indeed contributed to rising wage inequality both within and between skill groups. In contrast, the growing employment share of exporters contributed to a reduction in wage dispersion.
    Keywords: Exports; wages; exporter wage premium; wage inequality; linked employer-employee data; decomposition
    JEL: F16 J31
    Date: 2010–10
  9. By: Kristian Behrens; Giordano Mion; Yasusada Murata; Jens Südekum
    Abstract: We develop a new general equilibrium model of monopolistic competition with heterogeneous firms, variable demand elasticity and multiple asymmetric regions, in which trade integration induces wage and productivity changes. Using Canada-US interregional trade data, we structurally estimate a theory-based gravity equation system featuring endogenous wages and productivity. Given the estimated parameter values, we first decompose "border effects" into a "pure" border effect, relative and absolute wage effects, and a selection effect. We then quantify the impacts of removing the trade distortions generated by the Canada-US border on regional market aggregates such as wages, productivity, markups, the mass of varieties produced and consumed, as well as welfare. Last, we extend the counterfactual analysis to the firm level by generating productivity distributions and their changes via simulation.
    Keywords: firm heterogeneity, monopolistic competition, general equilibrium, endogenous markups, gravity equation system, counterfactual analysis
    JEL: F12 F15 F17
    Date: 2009–10
  10. By: Timo Mitze
    Abstract: For spatial data with a sufficiently long time dimension, the concept of global cointegration has been recently included in the econometrics research agenda. Global cointegration arises when non-stationary time series are cointegrated both within and between spatial units. In this paper, we analyze the role of globally cointegrated variable relationships using German regional data (NUTS 1 level) for GDP, trade, and FDI activity during the period 1976–2005. Applying various homogeneous and heterogeneous panel data estimators to a Spatial Panel Error Correction Model (SpECM) for regional output growth allows us to analyze the short- and long-run impacts of internationalization activities. For the long-run cointegration equation, the empirical results support the hypothesis of export- and FDI-led growth. We also show that for export and outward FDI activity positive cross-regional eff ects are at work. Likewise, in the short-run SpECM specification, direct and indirect spatial externalities are found to be present. As a sensitivity analysis, we use a spatial weighting matrix based on interregional goods transport fl ows rather than geographical distances. This scheme thus allows us to address more soundly the role of positive and negative effects of trade/FDI on output activity for a system of interconnected regions.
    Keywords: Cointegration; Spatial Durbin model; growth; trade; FDI
    JEL: C21 C22 C23 F43
    Date: 2010–11
  11. By: Terra Cristina; Vasconcelos Enrico (Universite de Cergy-Pontoise, THEMA, F-95000 Cergy-Pontoise.; Graduate School of Economics, Fundação Getulio Vargas, and Secretaria de Política Econômica, Ministério da Fazenda)
    Abstract: Using a general equilibrium model with private R&D financing, this article investigates the impact of trade openness to trade on growth and on welfare for two countries equal in all aspects, except for the quality of credit markets. We show that opening to trade increases growth in the country with better credit markets (North) and decreases it in the other country (South). With respect to trade pattern, South imports high tech goods and exports traditional goods. In terms of welfare, opening to trade may lower the welfare of individuals in the short run, but in the long run all of them are better o¤ under free trade than if they were under autarky.
    Keywords: credit markets; growth; trade pattern
    JEL: F12 G11 O16
    Date: 2010
  12. By: Alberto Felettigh (Bank of Italy); Stefano Federico (Bank of Italy)
    Abstract: The aim of this paper is to compare the price elasticity of import demand in the destination markets of Italian exports to the price elasticity in the destination markets of the other main euro-area countries’ exports. To this end, we use the elasticities of substitution across varieties estimated for each destination market (defined as a country-product combination) by Broda, Greenfield and Weinstein (2006). We find that Italy exports to markets which have, on average, a lower price elasticity than the markets where France, Germany and Spain sell their exports. The result is mainly driven by the motor vehicle and other transport equipment sectors. Net of these two industries, the export elasticities of the four countries are basically identical. The sectoral and geographical composition of Italian exports therefore does not seem to expose them to a relatively more elastic demand, contrary to the indications of part of the literature.
    Keywords: exports, elasticity of substitution, Armington varieties, international specialization, price elasticity of exports
    JEL: F12 F14
    Date: 2010–10
  13. By: Park, Innwon; Park, Soonchan; Kim, Sangkyom
    Abstract: This paper evaluates whether the proposed FTAAP is a desirable policy option for APEC member economies and the world economy. More specifically, this paper quantitatively investigates whether the FTAAP satisfies conditions for a trade bloc to generate positive and sufficient net trade creation effect. In addition, this paper estimates the likely impact of the FTAAP by using a CGE model analysis. Based on statistical data analysis, this paper strongly argues that the FTAAP can be a desirable regional trade bloc able to generate positive gains from freer trade. From the ex-ante scenario analysis using both static and capital accumulation CGE Models, this paper concludes that the FTAAP has great potential for improving welfare of participating APEC economies and will boost economic growth in the region. In particular, the FTAAP would be even better if it can be linked with liberalization of trade in services and enhanced trade facilitation.
    Keywords: Regional Trade Agreement (RTA); APEC; FTAAP; Computable General Equilibrium (CGE); Trade in Services; Trade Facilitation
    JEL: F15 F13
    Date: 2010–09–01
  14. By: Kevin E. Staub (Socioeconomic Institute, University of Zurich)
    Abstract: The usual decomposition of effects in corner solution models into extensive and intensive margins is generally incompatible with a causal interpretation. This paper proposes a decomposition based on the joint distribution of potential outcomes which is meaningful in a causal sense. The difference between decompositions can be substantial and yield diametrically opposed results, as shown in a standard Tobit model example. In a generalized Tobit application exploring the effect of reducing firm entry regulation on bilateral trade flows between countries, estimates suggest that using the usual decomposition would overstate the contribution of the extensive margin by around 15%.
    Keywords: Limited dependent variables, potential outcomes, causality, conditional-on-positives effect, Tobit, two-part model, country margins of trade
    JEL: C24 C34 F14
    Date: 2010–11

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